UPDATE 1-RBI seeks to optimise capital structure with sub exchange

Published 3:24 PM ET Sun, 11 Nov 2012

(Adds background, context and issuer comment)

By Helene Durand

LONDON, Oct 10 (IFR) - Raiffeisen Bank International announced plans to optimise its capital structure on Wednesday by asking investors to exchange an Upper Tier 2 note callable later this month into a new longer dated Tier 2 security.

However, RBI's offer came at the same time as a warning to investors that it would decide whether to call the 5.77% EUR600m bond (callable on October 29) with reference to prevailing regulatory, economic, and market conditions.

It is the first time that the Austrian bank has used this type of wording on an announcement related to Tier 2 debt. The bank has previously always exercised the call option on that type of paper.

It did, however, use similar wording when it conducted a hybrid Tier 1 buy-back in February/March of this year. It is also following a growing number of issuers that have used similar wording in their liability management announcements as the environment for refinancing subordinated debt has become more challenging.

According to a spokesperson at the issuer, RBI wants to give investors the opportunity to switch into a new security that will pay more than the outstanding once the call date has passed.

The 5.77% coupon on the Upper Tier 2 will switch to Euribor plus 215bp after October 29, which equates to around 2.35%, much lower than the proposed 5.875% coupon on the new Tier 2.

The spokesperson added that there would also be a capital benefit for RBI.

"The Upper Tier 2 notes lose 40% of regulatory capital eligibility after the call date, whereas we expect the new bonds to be 100% eligible, although we will only have full clarity on this once the final vote on the Capital Requirement Regulation has been passed," she said.

"We evaluated various options and felt this approach would be a good solution for investors and the bank."

RBI looks set to be able to achieve a better pricing from this captive investor base via liability management than it would have been able to in the primary market.

For instance, a EUR500m bullet Tier 2 for Erste Bank priced at the beginning of October with a 7.125% coupon and a spread of 540bp over mid-swaps.

The new notes will mature on April 27 2023 and have a one-time call on April 27 2018. The 5.875% coupon on the new notes will be non-deferrable and will have a one-time reset at mid-swaps plus 484bp. The exchange will be on a par-for-par basis.

The offer expires on October 23 and will be settled on October 29. Deutsche Bank, Bank of America Merrill Lynch, RBI are handling the exercise.

RBI is no stranger to liability management. The bank made a EUR113m capital gain from its hybrid buy-back executed in March at a discount to par, which improved its capital ratio by 0.12% .